Wednesday, June 10, 2009

Mortgage rate is going up

I was not expecting that. I thought with the economy so bad, the Fed would keep the interest rate low in hope to stimulate the economy.

Well, just realized how wrong I am. It works this way:

The Government is trying to raise too cash, and the way they do it is by issuing bonds. The problem is too much cash is been handed out by government and people are waring about if they can pay it back. So to attract more bond buyers, they have to raise interest on those bonds, which in turn raise interesting on everything, include my mortgage rate.

My question is, since right now there is deflation, isn't it better to raise cash by printing them than issuing bonds? I know either are good solutions, but since US government doesn't care about deficit at this point, printing cash will do better at the short run (and both print cash and borrowing are bad at the long run).